On June 25th, Abercrombie & Fitch Co. (NYSE:ANF) Board member Craig Stapleton directly acquired 10,000 shares of stock at prices of about $44 per share. We track insider trading activity because economic theory suggests that insiders should generally prefer to diversify their wealth rather than see the increased company-specific risk which comes with buying more shares. Studies show that stocks bought by insiders narrowly outperform the market (read our analysis of studies on insider trading) and we think that this is because purchases should tend to take place when insiders are more confident in the company. Following his purchases Stapleton owns a little over 27,000 shares, so this was a significant percentage increase in his holdings. The $3.8 billion market cap apparel retailer has risen in price a bit since these purchases.
The first quarter of Abercrombie & Fitch Co. (NYSE:ANF)’s fiscal year ended in early May. Revenue decreased by 9% versus a year earlier, led be a decline in sales at U.S. stores (same-store sales were down over 10%). All three of the company’s largest brands- Hollister, Abercrombie & Fitch itself, and abercrombie- experienced lower revenue. The operating loss during the quarter- a weak one for the business in terms of seasonality- was about half of what it had been in the prior year period. The current valuation prices Abercrombie & Fitch Co. (NYSE:ANF) at 16 times its trailing earnings, a decent multiple for an apparel retailer in the current environment though we would want to see the company improve its bottom line before thinking of it as a potential value stock. Analysts are bullish, with their consensus projections implying a forward P/E of 12 and a five-year PEG ratio of 0.9.
We maintain a database of quarterly 13F filings from hundreds of hedge funds, using the included information to help us develop investment strategies (for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year). We can also use this database to check interest in individuals stocks among top managers, and can see that billionaire Steve Cohen’s SAC Capital Advisors had 2.3 million shares of Abercrombie & Fitch Co. (NYSE:ANF) in its portfolio at the end of March (see Cohen’s stock picks).
Peers for Abercrombie & Fitch include American Eagle Outfitters (NYSE:AEO) and The Gap Inc. (NYSE:GPS). Each of these two companies trades at 17 times trailing earnings, essentially in line with Abercrombie & Fitch Co. (NYSE:ANF)’s own multiple. There are significant differences between these two companies in terms of their recent performance, however (though investors should understand that with seasonality this is a less important quarter for them as well).
American Eagle reported a decline in revenue, and while it was profitable for its Q1 there was a significant decline in net income. We’d note that its dividend yield of 2.7% is high for the industry. Results were much better at Gap, with higher sales and a more than 40% increase in earnings over the last year (though analysts expect low growth from this point forward, and revenue growth was not particularly strong).
We can also compare the company to Aeropostale Inc (NYSE:ARO) and Guess?, Inc. (NYSE:GES). These businesses both saw declining sales in their most recent quarter compared to the same period in the previous fiscal year, and each of them is a somewhat popular short target with about 15% of the float held short. Aeropostale’s net income has been quite low on a trailing basis, and even with the sell-side expecting it to improve going forward it is valued at a premium to its peers at a forward P/E of over 20. So we don’t think it is a good buy right now. At a trailing earnings multiple of 17 Guess is priced in line with the three retailers we’d discussed previously, though at least in its last quarterly report financial performance was weak with a more than 60% fall in earnings compared to a year ago.
We’d hesitate to buy most of these companies at current prices until their performance improves. Gap is worth a look, we think, though Wall Street analysts are skeptical of continued growth at the company. Abercrombie & Fitch Co. (NYSE:ANF) has been improving its margins, we suppose, but to see operating losses even in a weak quarter is not good news and we also aren’t confident that the decline in same-store sales will be reversed quickly. As a result we would avoid it at least for now.
Disclosure: I own no shares of any stocks mentioned in this article.
